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Chapter 18

Profitability ratios

4.1 Return on capital employed (ROCE)

People who invest their money in a business entity are interested in the return the
entity is earning on that capital. Expressing this return in the form of a ratio enables
comparison with other possible investment opportunities.

ROCE measures the earnings generated per $1 of capital. It is usually stated as a
percentage.

The ROCE is calculated as follows:

Operating profit
Average capital employed × 100%

Capital employed can consist of total capital employed (equity + non-
current liabilities) or just equity.

Tutor notes guidance – discussion points

Discuss with students possible explanations for changes in the return on capital

employed.

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